Seven banks began trading onshore Chinese yuan options today.
According to the China Foreign Exchange Trade Center, the firms were: Bank of China; Bank of Communications; China CITIC Bank; Citibank (China); Deutsche Bank (China); HSBC Bank (China); and Industrial and Commercial Bank.
Beng-Hong Lee, head of FX trading for China at Deutsche Bank in Shanghai, said he was seeing trades with tenors of up to six months, notionals in the USD10-20 million range and delta between 25-50. Under current regulations, corporate end users may only buy options while dealers may buy and sell. Much of the activity, Lee said, was interbank as the firms began building a pricing model and deepening liquidity.
There will be new challenges on the part of the regulator, Lee said. For both the market and the regulator, a major challenge will be developing a price fixing model, he said.
Banks need an additional license to trade with end users. Lee said he was unsure how many of the initial seven banks had them in place. Deutsche Bank does not yet have the license, but has been involved in conversations with corporate clients interested in entering the market. The corporates also need to get the appropriate infrastructure in place including risk management models and internal approval.
In the next one or two months we expect more corporates incorporating option solutions as part of their hedging strategy, he said. As the market develops, Lee said he hopes the regulators will open more hedging strategies to corporates such as collars and put spreads. For a market to grow you need buyers and sellers; right now you only have buyers, he said. Its a smart step on the part of the regulators. They want to build a volatility market and the right pricing, but then we hope, once hedgers' understanding of the instrument allow, they open basic options-related structures that are not speculative to the corporates.